MONOPOLY INSURANCE AND ENDOGENOUS INFORMATION

We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (...

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Bibliographic Details
Published inInternational economic review (Philadelphia) Vol. 59; no. 1; pp. 233 - 255
Main Authors Lagerlof, Johan N M, Schottmuller, Christoph
Format Journal Article
LanguageEnglish
Published Philadelphia Wiley Periodicals, Inc 01.02.2018
Blackwell Publishing Ltd
Subjects
Accidents
Consumers
Economic theory
Endogenous
Equilibrium
Information gathering
Insurance
Insurance coverage
Monopolies
Risk exposure
Risk management
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Summary:We study a monopoly insurance model with endogenous information acquisition. Through a continuous effort choice, consumers can determine the precision of a privately observed signal that is informative about their accident risk. The equilibrium effort is, depending on parameter values, either zero (implying symmetric information) or positive (implying privately informed consumers). Regardless of the nature of the equilibrium, all offered contracts, also at the top, involve underinsurance, which discourages information gathering. We identify a missorting effect that explains why the insurer wants to discourage information acquisition. Moreover, lower information gathering costs can hurt both consumer and insurer.
Bibliography:christoph.schottmueller@econ.ku.dk
We are grateful for helpful comments from three anonymous referees, the editor Hanming Fang, and seminar audiences at the University of Copenhagen, Humboldt University Berlin, TILEC (at Tilburg University), EARIE 2013 (in Évora, Portugal), EEA 2014 (in Toulouse, France), and RES 2015 (in Manchester, U.K.). Please address correspondence to: Christoph Schottmüller, Department of Economics, University of Copenhagen, Øster Farimagsgade 5, Building 26, DK‐1353 Copenhagen K, Denmark; E‐mail
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ISSN:0020-6598
1468-2354
DOI:10.1111/iere.12268